Indian microfinance: How did the saviour of the poor become enemy number one?

Microfinance institutions, which give micro loans to poor people in developing countries, have been hit in India by charges of profiteering and causing farmer suicides. Now authorities are taking action and local people are fighting back.

Microfinance, once hailed as the saviour of millions of the world’s underprivileged, could be on the brink of collapse in one of its largest markets, India.

The southern Indian state of Andhra Pradesh, the largest microfinance hub in the country, has introduced measures aimed at halting the “harassment” of borrowers by imposing penalties on those who attempt to coerce borrowers.

Furthermore, two weeks ago the state passed measures halting debt repayments, sending shockwaves through the industry. Authorities have now allowed for repayments to recommence, but such has been the force of the backlash against the sector, many borrowers are now refusing to pay-up.

Local officials say the new measures are aimed at protecting the poor from usurious interest rates and heavy-handed practices, which they say have triggered a spate of suicides in the state.

However, many microlenders and industry insiders fear that the new measures could seriously harm the country’s $6.5 billion microfinance industry.

Pioneered by Nobel prize-winner Muhammad Yunus, microfinance has been feted as a model that enables millions of poor people in developing countries to access micro loans which otherwise would have been unavailable to them through traditional platforms, such as banks. Typically, microlenders lend small amounts of money to people to start small business ventures. India has around 30 million microfinance clients, all borrowing on average $144.

Although the measures are restricted to Andhra Pradesh so far, the southern Indian state is considered a bellweather for the industry in India. The state’s capital, Hyderabad, is a high-tech hub and the state is home to some of the world’s largest microlenders such as SKS Microfinance.

Spate of suicides

While state government officials say the industry’s usurious practices are responsible for more than 30 recent suicides in Andhra Pradesh, industry officials say microfinance loans constitute a tiny fraction of the many problems the victims faced.

In an interview with FRANCE 24, Atul Takle of leading market player SKS Microfinance said that even though 17 out of SKS’ 7.3 million customers did commit suicide in the past few months, “there were no arrears and their payments were always on time”.

Takle noted that “suicide is a very complex subject and we are not convinced that the suicides were on account of their inability to pay Rs 224 [$5], their weekly installment.”

The real problem, according to several industry insiders, lies with unregistered, informal lenders who pressure borrowers using methods that have alarmed industry watchers.

In an interview with FRANCE 24, a senior MFIN official, who declined to be named, said the latest measures attempts to “regulate the already regulated” and that “not much” is done “about the non-regulated, where the problem actually lies.”

Loansharks to benefit?

According to the senior MFIN official, the Andhra Pradesh state government has not conducted an independent investigation into the suicides, neither have they addressed the issue of high interest rates.

The social mission behind the original establishment of the industry has been brought into question with microfinance institutions typically charging interest rates of between 24 and 36 percent. Reports have also emerged of some unregulated players charging as much as 60 percent.

On Wednesday, SKS voluntarily reduced its rates of interest in the affected state from an existing 26.7 % to 24.55%.

A number of financial analysts who observe the industry argue, however, that one of the underlying problems for the entire sector has been a failure on their part to investigate the capacity to repay, source of income or expenditure of the borrower.

The state government has attempted to address the issue by launching an investigation into the suicides. Officials say the investigation commission will complete its work next week.

According to Sanjay Sinha, a microfinance specialist and industry observer, warns that crippling the microfinance industry could benefit local money lenders who charge exorbitant interest rates and have traditionally been the bane of India’s vast, impoverished rural sector.

One thought on “Indian microfinance: How did the saviour of the poor become enemy number one?”

MFIs were touted to provide the poor access to affordable credit, reduce poor people’s need to use moneylenders and indebtedness. In short, provide a much kinder, cheaper alternative to the village loan shark. Instead, they evolved as the new class of institutionalized loan sharks which neo-liberals gave respectability to. MFIs did improve access to micro loans but failed in their touted mission to provide affordable and gentler credit and above all, one that lifted people from the clutches of poverty. Objects of institutional financial sustainability exhort them to charge interest rates and fees high enough to cover the costs of their lending and other services.

MFIs argue that they need a spread apart from all costs to provide for contingencies and growth. Fine but the moot question is how much should be this spread.

MFIs argue that economies of scale and competition will drive interest rates down. This remains only a theoretical argument. “Mexican micro-finance institutions charge such high rates simply because they can get away with it”, said Emmanuelle Javoy, the managing director of Planet Rating, an independent Paris-based firm that evaluates micro lenders!!

If at all, the average Indian MFI interests rates appear more benign than in Latin America or Nigeria, then it simply because other than factors internal to the MFI industry, the sector faces strong competition from governmental and NGO SHG micro-saving programmes in the absence of which, these MFIs would have formed a cartel. Past angry public and government reactions that resulted in a backlash against them, which included the arrests of MFI top leaders, like Uday Kumar of Share Microfinance Ltd as in 2007, keeps their profiteering impulses under check.

The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. By 2014, they target to reach 110 million borrowers. Remarkably, despite two decades of operations, if statistics are to be believed, these MFIs only reach just 20 million people in the country, a good proportionate of them, multiple counted. Yet, they succeed in gaining an attention, so disproportionate to this minuscule reach. Act now to prevent they becoming an epidemic in the country. Act now, when they are most vulnerable.

And how do know they are vulnerable? Because Vijay Mahajan, the father of MFIs in India tells us so:

“We are facing collapse. Unless something changes on the ground, the industry as we know it is basically gone. ”

Mahajan, we have news for you. The day when the likes of you are gone, that will be the turning point for the fight against poverty!

What’s wrong with Micro-finance Institutions? Practically everything as the case of SKS illustrates.